China’s bank­ing reg­u­la­tor drafting bank­ruptcy rules

China Daily (Canada) - - BUSINESS - By JIANG XUE­QING jiangx­ue­qing@chi­

China’s top bank­ing reg­u­la­tor is drafting rules on bank­ruptcy risk han­dling for com­mer­cial banks, aim­ing to pro­vide suf­fi­cient guar­an­tees for rapidly and thor­oughly deal­ing with banks in cri­sis.

In re­ply to a pro­posal by the fifth ses­sion of the 12th Na­tional Peo­ple’s Congress, the top leg­isla­tive body of China, the China Bank­ing Reg­u­la­tory Com­mis­sion said it will strengthen com­mu­ni­ca­tions with leg­is­la­tors to push for­ward with le­gal pro­tec­tion for close-out net­ting, the pri­mary means of mit­i­gat­ing credit risks as­so­ci­ated with over-the-counter de­riv­a­tives. The CBRC will also com­mu­ni­cate with the In­ter­na­tional Swaps and De­riv­a­tives As­so­ci­a­tion on es­tab­lish­ing a close-out net­ting ar­range­ment for Chi­nese com­mer­cial banks.

“The up­com­ing reg­u­la­tion on bank­ruptcy risk han­dling for com­mer­cial banks will set a sound le­gal foun­da­tion for a bank to with­draw from the fi­nan­cial mar­ket at a low costs, low risks and high ef­fi­ciency,” said Zeng Gang, di­rec­tor of bank­ing re­search at the In­sti­tute of Fi­nance and Bank­ing un­der the Chi­nese Acad­emy of So­cial Sciences. “The launch­ing of the with­drawal mech­a­nism, which is in ac­cor­dance with China’s in­ter­est rate lib­er­al­iza­tion and fi­nan­cial mar­ke­ti­za­tion, will help pre­vent spillover risk among bank­ing in­sti­tu­tions. It doesn’t mean a large num­ber of Chi­nese banks will col­lapse.”

Added Wu Qing, di­rec­tor of the com­pre­hen­sive re­search of­fice of the Re­search In­sti­tute of Fi­nance at the De­vel­op­ment Re­search Cen­ter of the State Coun­cil: “It is ab­so­lutely nec­es­sary to es­tab­lish the le­gal pro­ce­dures to deal with bank­ruptcy of com­mer­cial banks, as the reg­u­la­tor will make laws to em­power banks to han­dle crises proac­tively and in ad­vance.”

China launched a de­posit in­surance sys­tem in 2015, an­nounc­ing that ac­counts with de­posits of up to 500,000 yuan ($74,863) per de­pos­i­tor will be in­sured if a bank suf­fers in­sol­vency or bank­ruptcy.

Com­pared with the in­tro­duc­tion of a de­posit in­surance scheme, it is more im­por­tant to es­tab­lish the le­gal and risk dis­posal pro­ce­dures, Wu said, not­ing it is in­creas­ingly pos­si­ble that bank­ruptcy will oc­cur in China’s bank­ing sys­tem as time goes by.

“The risk will be higher at smal­land medium-sized banks, es­pe­cially some newly founded vil­lage and town­ship banks, if they fail to reach net profit on a profit and loss ac­count in the next few years.”

Fore­see­ing an un­even dis­tri­bu­tion of risks, he said city com­mer­cial banks and ru­ral com­mer­cial banks, faced with in­creas­ingly in­ten­si­fied com­pe­ti­tion, are in dan­ger of los­ing busi­ness, and tech­no­log­i­cal ad­vance­ment is likely to reshuf­fle the bank­ing in­dus­try, thus leav­ing some banks in a cri­sis of sur­vival.

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